2/24/2010 @ 12:01AM

Did Stimulus Create Any Jobs?

Last week marked the first anniversary of President Obama’s stimulus package, the American Recovery and Reinvestment Act (ARRA). The ARRA, which was based on Keynesian ideas, was intended to improve the economy by increasing aggregate demand, through a combination of temporary tax breaks for some taxpayers and higher government spending.

The ARRA was expected to keep unemployment below 8% in 2009. But despite its passage, unemployment rose to 10% by the end of last year, with more than 3 million additional lost jobs.

While the ARRA did not achieve its initial goals, many, including President Obama, consider it a major success. It has been credited for the large change in GDP growth that occurred between the first quarter of 2009, when GDP declined at more than a 6% annualized rate, and the second quarter, when GDP was roughly unchanged. More broadly, the Administration and others argue that the ARRA has saved up to 2 million jobs and prevented an economic meltdown similar to the Great Depression.

President Obama said last week, “One year later, it is largely thanks to the Recovery Act that a second Depression is no longer a possibility.” But others, including Republican House leader John Boehner, argue that the stimulus has been unsuccessful. In a report issued last week, Representative Boehner said: “By the Democrats’ own metrics, the ‘stimulus’ hasn’t worked: it’s chock-full of wasteful government spending that has funneled money to congressional districts that don’t exist and the Administration’s claims of jobs “saved or created” were so exaggerated that it quietly abandoned the metric at the end of last year.”

So after a year of the ARRA, what can we say about its impact on the economy?

It is very hard to support the claim that the ARRA was responsible for the turnaround in GDP growth early last year. This is because the turnaround was from productivity growth, which is part of the supply side of the economy. And the supply side is unrelated to the Keynesian ideas of demand management that are the foundation of the ARRA.

To understand this, note that GDP growth is the sum of productivity growth and growth in the number of hours worked. Nonfarm productivity was roughly unchanged during the first quarter of 2009, and consequently GDP tumbled as a result of that quarter’s substantial job losses. However, productivity grew at nearly a 7% annual rate in the second quarter. This second- quarter productivity surge offset continuing large employment losses, and resulted in GDP changing little during the second quarter.

Since that time productivity has continued to grow at more than twice its normal rate. This supply-side factor, not aggregate demand, is the reason why output and income growth quickly bottomed out last spring and have been rising since then, despite continuing job losses throughout last year.

And what of the claim that there would have been another 2 million jobs lost if the ARRA had not been passed? Some components of the bill, such as aid to cash-strapped states–including my own fiscally irresponsible State of California–likely staved off layoffs of some state workers through state-level mini-bailouts. But there are good reasons to be skeptical of the broader claim of 2 million jobs saved, which reflects the view that financial crises lead to very large and prolonged recessions.

This view holds that substantial job losses would have continued long after the worst of the financial crisis was over in late 2008, and that the ARRA was required to prevent at least some of that loss. But this view, which is based on financial crises in other countries, isn’t applicable to the U.S. Specifically, a key reason recessions drag on long after financial crises in other countries are resolved is because productivity in most crisis episodes doesn’t recover. In sharp contrast, and as noted above, U.S. productivity has been growing at twice its normal rate since early last year. More broadly, recovery from recessions in the U.S., particularly from severe recessions, typically occurs when productivity growth increases, which reduces unit labor costs, increases business profitability and then leads to employment recovery.

This pattern occurred in our last severe recession (198182), when declining productivity and sharply rising labor costs depressed employment and output. But by 1983 productivity growth accelerated, which began to reduce unit labor costs, and employment increased rapidly, quickly restoring job loss and reducing the unemployment rate by three percentage points to its prerecession level within 14 months of recovery.

But this pattern of recovery from a severe recession is not being repeated now, and many forecasts call for unemployment to remain high for years. In fact, the remarkable increases in productivity that have been occurring over the last year should be leading to a truly blockbuster recovery, not continuing job loss.

The U.S. has long been a job creation machine, generating more than 70 million jobs between the end of World War II and the last business cycle peak. This begs the question of why that machine is working so poorly now. One view is that the economy needs additional short-run interventions, including a temporary hiring tax credit, as in the current Senate jobs bill, to jump-start an employment recovery. There are risks, though, that this plan may actually make matters worse by delaying hiring as employers wait for the tax break.

My own sense is that the breakdown in America’s job-creation machine will not be solved by additional short-run interventions. It reflects continuing uncertainty over the evolution and development of future policies, including concerns about taxes, the federal budget and health and regulatory policies. More broadly, employers have well-founded concerns about the level of commitment in Washington to enhancing the incentives to work, save and invest, and the commitment to policies that promote the most competitive and well-functioning markets. I expect that employment growth will likely remain weak as long as these concerns continue.

Lee E. Ohanian[http://www.leeohanian.com] is a professor of economics and director of the Ettinger Family Program in Macroeconomic Research at UCLA.